Democratic Developmental State

Kidanemariam B. Hailu

DOC 11102

National Graduate Institute for Policy Studies (GRIPS)

February 24, 2014

Principles of Neoliberalism

• Price mechanism: economic intervention by governments is the source of

market failure and hence remove the state from all but minimal role. Allowing

demand and supply to determine resource allocation is more reliable than to

rely on politicians and bureaucrats (Friedman, 1962: Capitalism and Freedom).

• Role of the government should be limited to the protection of individual and

property rights, enforcement of contracts, and safeguarding competition

among economic actors. The neoliberal paradigm’s ideal state is the night

watchman state (Meles Zenawi, 2012).

• The market can always provide solutions to problems seemingly caused by the

market.

Principles of Neoliberalism …. The following are taken from Robert Wade’s 2010 presentation on

AFTER THE CRISIS: INDUSTRIAL POLICY & DEVELOPMENTAL STATE

• “A nation that opens its economy and keeps government’s role to a minimum invariably experiences more rapid economic growth and rising incomes.” (Robert Wade, 2010 from consensus at World Economic Forum, 2002, New York Times, 9 Feb, 2002, p.1).

• “Restrictions to market access for foreign investment should only apply to exceptional cases where national security is at stake”. (G8 communique, June 2007).

• “Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities… The belief that people make rational decisions and the market automatically responds to them still prevails…. Graduate students who stray too far from the dominant theory and methods seriously reduce their chances of getting an academic job”. (Patricia Cohen, New York Times, 4 Mar 2009) [Also, a job in World Bank/IMF.]

Functions of State in Neoliberalism

• In a free society the state does not administer the affairs of men.

It administers justice among men who conduct their own affairs.

• Ensure macroeconomic stability (price stability).

• Liberalize trade

• Protection of individual and property rights, enforcement of

contracts, and safeguarding competition among economic

actors.

• Improve business environment.

• Genarally, in the words of Meles (2012), the state has a night

watchman role in the economy.

Neoliberalism in Practice

• Great recession has led to widespread skepticism on the

reliability of market economy.

• “Maldistribution of wealth, a few haves and so many have not's”.

• Much of the evidence runs against the neoliberal, and yet these

evidences have tended to be ignored over past 30 years.

• All these and others have opened the way to a renewed thinking

of the role of state in development.

Developmental state

• Meles Zenawi (former PM of Ethiopia ) boldly challenged the neoliberal

policy prescriptions and openly stated that Africa needs a paradigm shift

away from the predatory state and neoliberal paradigm to a home-grown

and more progressive one, i.e. the democratic developmental state.

• Prof. Akbar Noman of the Colombia University in his interview once said that

“as far as I know, PM Meles Zenawi was the first head of government to

criticize many of the neoliberal prescriptions very early. The Washington

consensus-type policies are accountable for the lost quarter century of

Africa. It is now widely accepted that there were lots of mistakes made in the

kind of conditionality imposed in Africa in the 1980s in particular.”

Developmental state Theoretical underpinnings of the developmental state argument (Zenawi, 2012):

• Two central tenets of the theory of the neoliberal paradigm to

limit the state into a night watchman state are rent-seeking and

solely self-interested behavior of citizens, politicians, public

officials, and states.

• Rent creation: promotes resource allocation and is growth-enhancing.

Rent creation in a competitive market can be dissipated by the process.

• Rent-seeking: process of transferring wealth through the aegis

government and hence so long as the state limits its activity to its night

watchman role, the economic process dominates and there will not be

rent-seeking (socially wasteful), only rent creation (socially useful).

Developmental state

• Meles argues such a distinction between growth-enhancing rent

creation and socially wasteful and state-created rent-seeking arises from

the fact that the neoliberal paradigm views rent-seeking as exogeneous

to the firm.

• However, there is no reason why state-created rent should be treated as

external to the firm. The missing point in the neoliberal paradigm is that

the possibility of the state-created rents to be endogeneous to the firm

and related to its performance.

• Firms that perform in a certain manner would be given access to the

rent and those that perform otherwise would have no such an access.

Developmental state

• In an environment where imperfect competition and market failure

prevail, endogenizing rent-seeking activity and relating it to growth-

enhancing performance of firms would result in an accelerated

growth. Such rent-seeking would be similar to rent creation.

• The rent would be dissipated overtime because the state would reduce

(remove) the rent as its necessity for growth decreases.

• This would result in efficient resource allocation as firms respond to

higher profits and invest in areas where the rent has been created by the

state aiming at accelerating growth.

• There would be limited wasteful lobbying as the rent is provided based on

performance.

Developmental state • Meles says that this idea can be challenged by the neoliberal school on the

ground that state actors make choices based on maximizing their self-interest,

and hence would not create rent on the basis of performance.

• Mesles argues that why would the state with the monopoly of coercion limit

itself to be night watchman.

• The solely self-interested individuals in the state would use their monopoly

of coercion to loot private property instead of protecting it, not to

impartially enforce contracts but to steal the property of others.

• As a sole self-interest maximizer, the state would do whatever it takes to

maximize its benefit.

• Thus, a night watchman state based on the motivation of maximizing self-

interest can be prove its theoretical impossibility.

Developmental state • Logical absurdity of the self-interest behavior (rational choice theory).

• Difficult to have a stable and coherent state if its sole motivation is

maximizing self-interest. State actors would act like self-maximizing

individuals and nothing would hold them together. State actors would act

like predator to loot and rob to increase their wealth.

• A well-behaved night watchman state can exist only if state actors are not

solely interest-maximizing.

• Such a state to exist, state actors need to have motives the keeps their self-

interesting behavior in check. This can happen if people are not only self-

interest maximizing, such a behavior can be kept in check.

Democratic Developmental State • For a developmental state to be successful in accelerating growth,

it would have to build a high social capital that is vital for its

endeavors, Patronage and rent-seeking would have to be stamped

out. These are the very same things that create the basis for

democratic politics that is relatively free from patronage.

• A successful developmental state would thus be very well placed

to be both developmental and democratic.

• The problem, however, is that it is unlikely to find an environment

where rent-seeking is removed and social capital is accumulated

when developmental state is established.

Democratic developmental sate

• Developmental state (DS) takes the responsibility to prepare the ground

and accelerate development at the same time.

• It becomes inevitable that patronage and rent-seeking to be the

stumbling blocks to democracy at the initial stage posing a trade off

between democracy and development.

• Policy continuity and sustained economic growth: developmental policy

is unlikely to transform a poor country into a developed one within the

time frame of the typical election cycle.

• It is argued therefore that the DS will have to be undemocratic in order

to stay in power long enough to carry out successful development.

Democratic developmental state

How does then the DS clean-up the mess of patronage and rent-

seeking at its initial stage other than undemocratic means?

• We can think of the social-democratic coalitions in some

Scandinavian countries and the center-right coalition in Post

Second World War Japan, the so called dominant partly

democracies which have played a developmental role and

exercised democracy.

• Studies show stable long-term coalitions which stay in power for

a long period but do so by democratic means can provide the

needed continuity and stability of policy.

Democratic developmental state

• Examples: coalitions based on the labor movement and

the middle classes in some Scandinavian countries, and

coalitions between rural population and the right in Japan.

• The ruling coalitions in these countries have had regular, free,

open and fair elections, and the basic political and human

rights have been respected.

• They thus fully qualify as democratic regimes. But they have

won elections repeatedly and have been in power for long-

stretches. In the case of Japan the ruling coalition has been in

power for almost 50 years.

Democratic developmental state

Can such a system be established in developing countries?

Candidates for such a coalition:

• The private sector cannot be part of the coalition.

• The developmental state must be autonomous from the private sector so

as to reward and punish the private sector actors depending on whether

their activities are developmental or rent seeking.

Democratic developmental state

• Who then can be the candidate(s) for the coalition? Two

alternatives:

1. The rural population

2. Wait until the creation of substantial business and middle class society

• However, the second alternative seems unlikely because such a

society cannot be created in developing countries without the DS.

What remains is to form coalition with the rural population

• Any democratic state, developmental or otherwise, in a developing

country will have to be agrarian at least in its initial stage.

Democratic developmental state

• A rural population based DS can use this to establish a stable coalition

that rules democratically by fulfilling the interests of the farmers.

• Agriculture as an engine of accelerated growth at least in the initial

period of the process of development.

• Equitable ownership of assets is a requirement for accelerated

development of agriculture.

• Commercialization of agriculture

• support marketing and improvement in productivity have to be

established.

• Resource flow from agriculture should maintain the incentives

for farmers to continue to increase production.

Democratic developmental state

Conclusion: Given that all of the above factors are fully consistent with the

interests of the farmers, the rural population can therefore be the solid

base for a stable developmental coalition in a developing country.

• Accelerated agricultural development also brings about changes in the

social structure of the peasant to transform him/her into a force for

democracy.

• With the votes of the peasants who constitute the bulk of the coalition,

with the democratic potentials of a socially transformed peasant, the

developmental coalition will have what it needs to rule democratically

and stamp out patronage and rent-seeking activities.

Democratic developmental state • A coalition based on the very sector, which has historically been the

victim, rather than the beneficiary of patronage and rent-seeking

activities will have all the will to stump it out.

• Benefiting form the accelerated growth, the urban middle classes and

labor could also be members of such coalition.

• A coalition with a vast majority of population that guarantees

continuity through the democratic process would be a solid base for a

state that is both democratic and developmental.

• Such a state forms the so-called dominant party or dominant coalition

democracy.

• Such a state based on a solid and dominant coalition of forces who have no

stake in patronage and rent-seeking would be able to avoid and overcome

socially wasteful patronage and rent-seeking.

Ethiopia’s Democratic developmentalism

• Ethiopia is the second largest country in Africa with population of

about 90 million, 85% of which live in rural areas.

• Govt understands that widespread market failure and rent-

seeking behavior are the two most important stumbling blocks

for development and installing democracy which can only be

stamped out by a strong state intervention.

• As a result, the former PM of Ethiopia Meles Zenawi has always

been uncomfortable with the neoliberal policy prescriptions of

the World Band and IMF and came up with a different alternative

of democratic developmentalism (DD) in Ethiopia.

Ethiopia's DD

• “Ethiopia’s DD can be defined as a political regime in which a

developmental party remains in power for a long time by consecutively

winning multi-party elections, under which policies that punish rent

seeking and encourage productive investment and technology absorption

are implemented under strong state guidance.” (Kenichi Ohno, 2012)

• For instance: Strategy of combining carrots and sticks policy in the

leather industry (Ohno, 2012)

• As carrots: Leather Institute (training, technology, etc.), donor support, twinning

with India, prioritized allocation of loans, matching with foreign firms, monthly

gov’t-business meetings and monitoring, etc.

• As sticks: a ban on raw material export and a high tax on semi-finished leather

Ethiopia's DD

• With a DS thinking, the govt controls over the key segments of the

economy (the commanding heights) such as banks, energy,

transportation, telecommunication and other heavy industries.

• Govt investment in an area where the private sector does not find

it attractive to invest.

• Since coming to power in 1991, the government has been

pursuing agricultural development led industrialization (ADLI) as a

development strategy.

• Hence its strong political base is the small farmers which occupy about

85% of the population.

Ethiopia's DD

How does the government gain support from the farmers? Are the

conditions for coalition satisfied?

• About 42% of GDP is allocated to the agricultural sector.

• Productive safety net programs.

• To increase agricultural production and productivity, a number of

agricultural package programs have been introduced to the farmers.

• Natural resource conservation programs.

• Commercialization of agriculture.

• Equitable asset distribution (85% agrarian society).

• Recognition of model farmers: millionaire farmers have been created.

• Introduction of health extension programs.

Ethiopia's DD

Source: Prof. Kenichi Ohno’s lecture

Gov’t

װ

Ruling party

Capitalists (Large & medium size producers,

merchants, banks, foreign firms)

Urban workers, SMEs, service providers

Small farmers (Drivers of agriculture?)

Political

coalition

Drivers of

industrialization

Leadership by strong

developmental state

Institutions, policies,

incentives (carrots &

sticks) for allocating

rents to value creators

and punishing rent

seekers

Donors

Professionals

Intellectuals

Ethiopia's DD Impact of DD on the Economy:

According to African Economic outlook report 2012:

• Ethiopia is among the fastest growing non-oil producing economies in Africa

with annual growth of about 11% since 2004.

• Growth was broad based with industry, services and agriculture growing by

15%, 12.5% and 9% respectively.

• Ethiopia is expected to achieve most of the Millennium Development Goals

(MDG) targets.

• Ethiopia demonstrated strong progress in the health sector under the flagship

of health extension programs.

• Income poverty declined from 38.7% in 2004/05 to 29.6% in 2010/11 owing to

sustained growth in per capita incomes.

References: • African Economic outlook report (2012):

http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Ethiopia%20Full%20PDF%20Country%20Note.pdf

• Ohno, K. (2013). Learning to industrialize: From given growth to policy-aided value creation. Routledge-GRIPS Development Forum Studies, Routledge, (Ch. 10).

• Zenawi, M. (2012). States and market: the neoliberal limitations and the case for developmental state. In Good Growth and Governance in Africa: Rethinking Development Strategies, edited by Akbar Noman, Kwesi Botchwey, Howard Stein and Joseph E. Stiglitz in Initiative for Policy Dialogue.

• Zenawi, M. African Development: Dead Ends and New Beginnings, preliminary draft (Ch. 7).

• Wade, R. (2009). Rethinking Industrial Policy for Low Income Countries. African Development Bank